US Treasury: revproc

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Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.204: Changes in accounting periods and in methods of accounting.(Also Part I, §§ 446, 1016; 1.446-1T, 1.1016-3T.)

Rev. Proc. 2004-11

SECTION 1. PURPOSE

This revenue procedure provides an automatic consent procedure allowing a

taxpayer to make a change in method of accounting under § 446(e) of the Internal Revenue

Code for depreciable or amortizable property after its disposition. This revenue procedure

also waives the application of the two-year rule set forth in Rev. Rul. 90-38, 1990-1 C.B. 57,

for certain changes in depreciation or amortization. Finally, this revenue procedure

modifies Rev. Proc. 2002-9, 2002-1 C.B. 327 (as modified by Rev. Proc. 2002-54, 2002-2

C.B. 432, Rev. Proc. 2002-19, 2002-1 C.B. 696, Rev. Proc. 2002-33, 2002-1 C.B. 963,

and as modified and clarified by Announcement 2002-17, 2002-1 C.B. 561), and other

revenue procedures to conform with § 1.446-1T(e)(2)(ii)(d) of the temporary Income Tax

Regulations.



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SECTION 2. BACKGROUND

.01 Section 446(e) and § 1.446-1T(e) provide that, except as otherwise provided, a

taxpayer must secure the consent of the Commissioner of Internal Revenue before

changing a method of accounting for federal income tax purposes. Section

1.446-1T(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures

setting forth the limitations, terms, and conditions deemed necessary to permit a taxpayer

to obtain consent to change a method of accounting.

.02 Concurrently with the issuance of this revenue procedure,

§§ 1.446-1T(e)(2)(ii)(d) and 1.1016-3T(h) have been promulgated. Section

1.446-1T(e)(2)(ii)(d) provides the changes in depreciation or amortization (hereinafter,

both are referred to as “depreciation”) that are (and are not) changes in method of

accounting under § 446(e). Section 1.1016-3T(h) provides that the “allowed or allowable”

rule under § 1016(a)(2) does not permanently affect a taxpayer’s lifetime income for

purposes of determining whether a change in depreciation or amortization is a change in

method of accounting under § 446(e).

.03 If a taxpayer uses an impermissible method of determining depreciation for a

depreciable or amortizable property, the taxpayer adopts that method of accounting for the

property when the taxpayer treats the property in the same way in determining gross

income or deductions in two or more consecutively filed federal tax returns. See Rev. Rul.

90-38. The Internal Revenue Service and Treasury Department recognize that this two-

year rule increases administrative and compliance costs associated with changes in



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depreciation because many taxpayers changing from an impermissible to permissible

method of accounting for depreciation used the impermissible method for depreciable or

amortizable properties placed in service in two or more taxable years before the year of

change as well as for depreciable and amortizable properties placed in service in the

taxable year immediately preceding the year of change. Accordingly, in the interest of

sound tax administration, the Service and Treasury Department have decided to waive the

two-year rule in Rev. Rul. 90-38 for a change in depreciation to which § 1.446-

1T(e)(2)(ii)(d) applies.

.04 If a depreciable or amortizable property is transferred in a transaction in which

the transferee is treated as the transferor for purposes of computing the depreciation

allowance for the property with respect to so much of the basis in the hands of the

transferee as does not exceed the adjusted depreciable basis in the hands of the

transferor (for example, in transactions subject to § 168(i)(7) or § 381(c)(6)), the transferee

may file a Form 3115, Application for Change in Accounting Method, to change from an

impermissible method of accounting adopted by the transferor for that portion of the basis

of the property to a permissible method of accounting for depreciation for the same portion

of the basis of the property, provided the impermissible method of accounting for that

portion of the basis of the property has not been changed by the transferor (through filing,

for example, a Form 3115 or an amended return) or by the Internal Revenue Service upon

examination of the transferor’s tax returns. In this case, the § 481 adjustment will include

any necessary adjustments since the property’s placed-in-service date by the transferor.



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SECTION 3. METHOD CHANGE PROCEDURE FOR DISPOSED DEPRECIABLE OR

AMORTIZABLE PROPERTY

.01 Scope.

(1) Applicability. Except as provided in section 3.01(2) of this revenue

procedure, section 3 of this revenue procedure applies to a taxpayer that is changing from

an impermissible method of accounting for depreciation to a permissible method of

accounting for depreciation for any item of depreciable or amortizable property subject to §

1.446-1T(e)(2)(ii)(d):

(a) that has been disposed of by the taxpayer during the year of

change (as defined in section 3.02(2)(b) of this revenue procedure); and

(b) for which the taxpayer did not take into account any depreciation

allowance, or did take into account some depreciation but less than the depreciation

allowable (hereinafter, both are referred to as “claimed less than the depreciation

allowable”), in the year of change (as defined in section 3.02(2)(b) of this revenue

procedure) or any prior taxable year.

(2) Inapplicability. Section 3 of this revenue procedure does not apply to:

(a) any property to which § 1016(a)(3) (regarding property held by a

tax-exempt organization) applies;

(b) any property for which a taxpayer is revoking a timely valid

depreciation election, or making a late depreciation election, under the Code or

regulations thereunder, or under other guidance published in the Internal Revenue Bulletin



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(including under § 13261(g)(2) or (3) of the Revenue Reconciliation Act of 1993, 1993-3

C.B. 1, 128 (relating to amortizable § 197 intangibles));

(c) any property for which the taxpayer deducted the cost or other

basis of the property as an expense; or

(d) any property disposed of by the taxpayer in a transaction to which

a nonrecognition section of the Code applies (for example, § 1031, transactions subject to

§ 168(i)(7)(B)(i)). However, this section 3.01(2)(d) does not apply to property disposed of

by the taxpayer in a § 1031 or § 1033 transaction if the taxpayer elects to treat the entire

basis (that is, both the carryover and excess basis) of the acquired MACRS property as

property placed in service by the taxpayer at the time of replacement and treat the

adjusted depreciable basis of the exchanged or involuntarily converted MACRS property

as being disposed of by the taxpayer at the time of disposition.

.02 Change in method of accounting.

(1) In general. A taxpayer within the scope of section 3 of this revenue

procedure may change from an impermissible method of accounting for depreciation to a

permissible method of accounting for depreciation for any item of depreciable or

amortizable property within the scope of section 3 of this revenue procedure, provided:

(a) the taxpayer files the original Form 3115 in accordance with

section 3.02(2)(c) of this revenue procedure, prior to the expiration of the period of

limitation for assessment under § 6501(a) for the taxable year in which the item of

depreciable or amortizable property was disposed of by the taxpayer; and



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(b) the taxpayer files an amended federal tax return for the year of

change (as defined in section 3.02(2)(b) of this revenue procedure) that includes the

adjustments to taxable income and any collateral adjustments to taxable income or tax

liability (for example, adjustments to the amount or character of the gain or loss of the

disposed depreciable or amortizable property) resulting from the change in method of

accounting for depreciation made by the taxpayer under this section 3.

(2) Application Procedures. A taxpayer making a change in method of

accounting under section 3 of this revenue procedure must follow the automatic change in

method of accounting provisions in Rev. Proc. 2002-9 (or its successor), with the following

modifications:

(a) The scope limitations in section 4.02 of Rev. Proc. 2002-9 do not

apply. If the taxpayer is under examination, before an appeals office, or before a federal

court at the time that a copy of the Form 3115 is filed with the national office, the taxpayer

must provide a copy of the Form 3115 to the examining agent, appeals officer, or counsel

for the government, as appropriate, at the time the copy of the Form 3115 is filed with the

national office. The Form 3115 must contain the name(s) and telephone number(s) of the

examining agent, appeals officer, or counsel for the government, as appropriate.

(b) The year of change is the taxable year in which the item of

depreciable or amortizable property was disposed of by the taxpayer.

(c) Section 6.02(3)(a) of Rev. Proc. 2002-9 is modified to require the

original of the Form 3115 to be attached to the taxpayer’s timely filed amended federal tax



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return for the year of change and a copy (with signature) of the Form 3115 to be filed with

the national office no later than when the original Form 3115 is filed with the amended

federal tax return for the year of change.

(d) For purposes of section 6.02(4)(a) of Rev. Proc. 2002-9, the

taxpayer should include on line 1a of the Form 3115 (revised December 2003) the

designated automatic accounting method change number for the change in method of

accounting for depreciation made under this section 3. This number for this method

change is “9.”

SECTION 4. WAIVER OF TWO-YEAR RULE IN REV. RUL. 90-38

.01 In general. Notwithstanding Rev. Rul. 90-38, a taxpayer may file a Form 3115

under Rev. Proc. 97-27, 1997-1 C.B. 680 (or its successor), or Rev. Proc. 2002-9, as

applicable, to change from an impermissible method of accounting for depreciation to a

permissible method of accounting for depreciation under § 1.446-1T(e)(2)(ii)(d) for any

depreciable or amortizable property subject to § 1.446-1T(e)(2)(ii)(d) and placed in service

by the taxpayer in the taxable year immediately preceding the year of change (as defined in

section 5.02(2) of Rev. Proc. 97-27 or section 5.02 of Rev. Proc. 2002-9, as applicable)

(hereinafter, this property is referred to as “1-year depreciable property”), provided the

additional term and condition in section 4.02 of this revenue procedure is satisfied.

Alternatively, the taxpayer may make the change from the impermissible depreciation

method to the permissible depreciation method for the 1-year depreciable property by

filing an amended federal tax return for the placed-in-service year prior to the date the



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taxpayer files its federal tax return for the taxable year succeeding the placed-in-service

year.

.02 Additional term and condition for filing a Form 3115. In addition to the terms

and conditions provided in Rev. Proc. 97-27 or Rev. Proc. 2002-9, as applicable, the

§ 481 adjustment reported on a Form 3115 that is filed by a taxpayer in accordance with

section 4.01 of this revenue procedure to make a change in method of accounting for

depreciation under § 1.446-1T(e)(2)(ii)(d) for any 1-year depreciable property, must

include the amount of any adjustment attributable to all property (including the 1-year

depreciable property) subject to the Form 3115.

SECTION 5. EFFECT ON OTHER DOCUMENTS

.01 Rev. Proc. 2002-9 is modified and amplified to include the accounting method

change provided under section 3 of this revenue procedure in section 2.05 of the

APPENDIX. See section 4 of the APPENDIX of this revenue procedure for the text of

section 2.05 of the APPENDIX of Rev. Proc. 2002-9.

.02 The heading for section 2 of the APPENDIX of Rev. Proc. 2002-9 is modified to

read as follows: “SECTION 2. DEPRECIATION OR AMORTIZATION (§ 56(a)(1),

56(g)(4)(A), 167, 168, 197, 1400I, OR 1400L, OR FORMER § 168)”.

.03 Rev. Proc. 2002-9 (as modified by Rev. Proc. 2002-33) is modified by deleting

sections 2.01, 2.02, and 2B of the APPENDIX and replacing them with the text in,

respectively, sections 1, 2, and 3 of the APPENDIX of this revenue procedure.

.04 Section 6.03 of Rev. Proc. 2000-38, 2000-2 C.B. 310, 313, is modified by



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deleting “See § 1.446-1(e)(2)(ii)(b).” and replacing it with “See

§ 1.446-1T(e)(2)(ii)(d)(3)(i).”

.05 Section 8.01 of Rev. Proc. 2000-50, 2000-2 C.B. 601, is modified to read as

follows: “A change in a taxpayer’s treatment of costs paid or incurred to develop,

purchase, lease, or license computer software to a method described in section 5, 6, or 7

of this revenue procedure is a change in method of accounting to which §§ 446 and 481

apply. Further, a change in useful life under the method described in section 5.01(2) or

6.01(2) of this revenue procedure is a change in method of accounting. See § 1.446-

1T(e)(2)(ii)(d)(3)(i) and, for the effective date, see § 1.446-1T(e)(4)(ii)(A).”

SECTION 6. EFFECTIVE DATE

.01 In general. Except as provided in section 6.02 of this revenue procedure, this

revenue procedure is effective for a Form 3115 filed for taxable years ending on or after

December 30, 2003.

.02 Transition rule for previously filed Forms 3115 for automatic consent.

(1) For a taxable year ending on or after December 30, 2003, a taxpayer

may make a change in method of accounting previously authorized in section 2.01, 2.02, or

2B of the APPENDIX of Rev. Proc. 2002-9 before any amendments were made to those

sections by this revenue procedure if:

(a) before December 30, 2003, the taxpayer filed a completed Form

3115 with the national office to make that change in method of accounting; and

(b) the taxpayer makes that change in method of accounting in



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compliance with all the applicable provisions of Rev. Proc. 2002-9 for the requested year

of change (as defined in section 5.02 of Rev. Proc. 2002-9) on that Form 3115.

(2) If a taxpayer filed a Form 3115 with the national office to make a change

in method of accounting previously authorized in section 2.01, 2.02, or 2B of the

APPENDIX of Rev. Proc. 2002-9 before any amendments were made to those sections by

this revenue procedure for a year of change for which this revenue procedure is effective

(see section 6.01 of this revenue procedure) and the taxpayer’s original federal tax return

for that year of change was not filed before December 30, 2003, the taxpayer may make

the change in method of accounting authorized under section 2.01, 2.02, or 2B, as

applicable, of the APPENDIX of Rev. Proc. 2002-9 as revised by this revenue procedure.

However, the Service will process the Form 3115 in accordance with the section of the

APPENDIX of Rev. Proc. 2002-9 in effect on the date on which the Form 3115 was filed

with the national office by the taxpayer unless on or before the due date (including

extensions) of the taxpayer’s federal tax return for the requested year of change (as defined

in section 5.02 of Rev. Proc. 2002-9) on that Form 3115, the taxpayer completes a new

Form 3115 to make the change under section 2.01, 2.02, or 2B, as applicable, of the

APPENDIX of Rev. Proc. 2002-9 as revised by this revenue procedure and files this newly

completed Form 3115 in duplicate in accordance with section 6.02(3)(a) of Rev. Proc.

2002-9. Additionally, the newly completed Form 3115 must include the statement:

“Section [insert, as appropriate: 2.01, 2.02, or 2B] of the APPENDIX of Rev. Proc. 2002-9

as revised by Rev. Proc. 2004-11.” This statement must be legibly printed or typed on the



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appropriate line on, or at the top of page 1 of, the Form 3115.

SECTION 7. DRAFTING INFORMATION

The principal author of this revenue procedure is Sara Logan of the Office of

Associate Chief Counsel (Passthroughs and Special Industries). For further information

regarding this revenue procedure, contact Ms. Logan or Douglas Kim on

(202) 622-3110 (not a toll free call).



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APPENDIX

SECTION 1. Section 2.01 of the APPENDIX of Rev. Proc 2002-9 is deleted and replaced

with the following:

“.01 Impermissible to permissible method of accounting for depreciation or

amortization.

(1) Description of change and scope.

(a) Applicability. This change applies to a taxpayer that wants to

change from an impermissible to a permissible method of accounting for depreciation or

amortization (depreciation) for any item of depreciable or amortizable property:

(i) for which the taxpayer used the impermissible method of

accounting in at least the two taxable years immediately preceding the year of change (but

see section 2.01(1)(b) of this APPENDIX for property placed in service in the taxable year

immediately preceding the year of change);

(ii) for which the taxpayer is making a change in method of

accounting under § 1.446-1T(e)(2)(ii)(d);

(iii) for which depreciation is determined under § 56(a)(1),

§ 56(g)(4)(A), § 167, § 168, § 197, § 1400I, § 1400L(b), or § 1400L(c), or under § 168

prior to its amendment in 1986 (former § 168); and

(iv) that is owned by the taxpayer at the beginning of the year of

change (but see section 2.05 of this APPENDIX for property disposed of before the year of

change).



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(b) Taxpayer has not adopted a method of accounting for the item of

property. If a taxpayer does not satisfy section 2.01(1)(a)(i) of this APPENDIX for an item

of depreciable or amortizable property because this item of property is placed in service

by the taxpayer in the taxable year immediately preceding the year of change (“1-year

depreciable property”), the taxpayer may change from the impermissible depreciation

method to the permissible depreciation method for the 1-year depreciable property by

filing a Form 3115 for this change, provided the § 481 adjustment reported on the Form

3115 includes the amount of any adjustment that is attributable to all property (including the

1-year depreciable property) subject to the Form 3115. Alternatively, the taxpayer may

change from the impermissible depreciation method to the permissible depreciation

method for a 1-year depreciable property by filing an amended federal tax return for the

property’s placed-in-service year prior to the date the taxpayer files its federal tax return for

the taxable year succeeding the

placed-in-service year.

(c) Certain scope limitations inapplicable. The scope limitations in

sections 4.02(7) and 4.02(8) of this revenue procedure are not applicable to this change.

(d) Inapplicability. This change does not apply to:

(i) any property to which § 1016(a)(3) (regarding property held

by a tax-exempt organization) applies;

(ii) any taxpayer that is subject to § 263A and that is required

to capitalize the costs with respect to which the taxpayer wants to change its method of

accounting under section 2.01 of this APPENDIX, if the taxpayer is not capitalizing the



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costs as required;

(iii) any property for which a taxpayer is making a change in

depreciation under § 1.446-1T(e)(2)(ii)(d)(2)(vi) or (vii);

(iv) any property subject to § 167(g) (regarding property

depreciated under the income forecast method);

(v) any § 1250 property that a taxpayer is reclassifying to an

asset class of Rev. Proc. 87-56, 1987-2 C.B. 674, or Rev. Proc. 83-35, 1983-1 C.B. 745,

as appropriate, that does not explicitly include § 1250 property (for example, asset class

57.0, Distributive Trades and Services);

(vi) any property for which a taxpayer is revoking a timely valid

election, or making a late election, under § 167, § 168, § 1400I, § 1400L, former § 168, or

§ 13261(g)(2) or (3) of the Revenue Reconciliation Act of 1993 (1993 Act), 1993-3 C.B. 1,

128 (relating to amortizable § 197 intangibles). A taxpayer may request consent to revoke

or make the election by submitting a request for a letter ruling under Rev. Proc. 2003-1,

2003-1 I.R.B. 1 (or any successor). See

§ 1.446-1T(e)(2)(ii)(d)(3)(iii);

(vii) any property for which depreciation is determined under §

56(g)(4)(A) or § 167 (other than under § 168, § 1400I, § 1400L, or former § 168) and a

taxpayer is changing the useful life of the property. A change in the useful life of property is

corrected by adjustments in the applicable taxable year provided under

§ 1.446-1T(e)(2)(ii)(d)(3)(i). However, this section 2.01(1)(d)(vii) of this APPENDIX does

not apply if the taxpayer is changing to or from a useful life, recovery period, or amortization



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period that is specifically assigned by the Internal Revenue Code (for example, § 167(f)(1),

§ 168(c)), the regulations thereunder, or other guidance published in the Internal Revenue

Bulletin and, therefore, this change is a change in method of accounting (unless section

2.01(1)(d)(xv) of this APPENDIX applies). See

§ 1.446-1T(e)(2)(ii)(d)(3)(i);

(viii) any depreciable property for which the use changes in the

hands of the same taxpayer. See § 1.446-1T(e)(2)(ii)(d)(3)(ii);

(ix) any property for which depreciation is determined in

accordance with § 1.167(a)-11 (regarding the Class Life Asset Depreciation Range

System (ADR));

(x) any change in method of accounting involving a change

from deducting the cost or other basis of any property as an expense to capitalizing and

depreciating the cost or other basis;

(xi) any change in method of accounting involving a change

from one permissible method of accounting for the property to another permissible method

of accounting for the property. For example:

(A) a change from the straight-line method of

depreciation to the income forecast method of depreciating for videocassettes. See Rev.

Rul. 89-62, 1989-1 C.B. 78; or

(B) a change from charging the depreciation reserve

with costs of removal and crediting the depreciation reserve with salvage proceeds to

deducting costs of removal as an expense (provided the costs of removal are not required



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to be capitalized under any provision of the Code, such as, § 263(a)) and including salvage

proceeds in taxable income (see section 2.02 of this APPENDIX for making this change

for property for which depreciation is determined under § 167);

(xii) any change in method of accounting involving both a

change from treating the cost or other basis of the property as nondepreciable or

nonamortizable property to treating the cost or other basis of the property as depreciable

or amortizable property and the adoption of a method of accounting for depreciation

requiring an election under § 167, § 168, § 1400I, § 1400L(b), former

§ 168, or § 13261(g)(2) or (3) of the 1993 Act (for example, a change in the treatment of

the space consumed in landfills placed in service in 1990 from nondepreciable to

depreciable property (assuming section 2.01(1)(d)(xiii) of the APPENDIX does not apply)

and the making of an election under § 168(f)(1) to depreciate this property under the unit of

production method of depreciation under § 167);

(xiii) any change in method of accounting for any item of

income or deduction other than depreciation, even if the change results in a change in

computing depreciation under § 1.446-1T(e)(2)(ii)(d)(2)(i), (ii), (iii), (iv), (v), (vi), (vii), or

(viii). For example, a change in method of accounting involving:

(A) a change in inventory costs (for example, when

property is reclassified from inventory property to depreciable property, or vice versa) (but

see section 3.02 of this APPENDIX for making a change from inventory property to

depreciable property for unrecoverable line pack gas or unrecoverable cushion gas); or

(B) a change in the character of a transaction from sale



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to lease, or vice versa (but see section 2.03 of this APPENDIX for making this change);

(xiv) a change from determining depreciation under § 168 to

determining depreciation under former § 168 for any property subject to the transition rules

in § 203(b) or 204(a) of the Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. 1, 60-80; or

(xv) any change in the placed-in-service date of a depreciable

or amortizable property. This change is corrected by adjustments in the applicable taxable

year provided under § 1.446-1T(e)(2)(ii)(d)(3)(v).

(2) Additional requirements. A taxpayer also must comply with the following:

(a) Permissible method of accounting for depreciation. A taxpayer

must change to a permissible method of accounting for depreciation for the item of

depreciable or amortizable property. The permissible method of accounting is the same

method that determines the depreciation allowable for the item of property (as provided in

section 2.01(5) of this APPENDIX).

(b) Statements required. A taxpayer must provide the following

statements, if applicable, and attach them to the completed application:

(i) a detailed description of the former and new methods of

accounting. A general description of these methods of accounting is unacceptable (for

example, MACRS to MACRS, erroneous method to proper method, claiming less than the

depreciation allowable to claiming the depreciation allowable);

(ii) to the extent not provided elsewhere on the application, a

statement describing the taxpayer’s business or income-producing activities. Also, if the

taxpayer has more than one business or income-producing activity, a statement describing



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the taxpayer’s business or income-producing activity in which the item of property at issue

is primarily used by the taxpayer;

(iii) to the extent not provided elsewhere on the application, a

statement of the facts and law supporting the new method of accounting, new classification

of the item of property, and new asset class in, as appropriate, Rev. Proc. 87-56 or Rev.

Proc. 83-35. If the taxpayer is the owner and lessor of the item of property at issue, the

statement of the facts and law supporting the new asset class also must describe the

business or income-producing activity in which that item of property is primarily used by the

lessee;

(iv) to the extent not provided elsewhere on the application, a

statement identifying the year in which the item of property was placed in service;

(v) if the item of property is depreciated under former § 168, a

statement identifying the asset class in Rev. Proc. 83-35 that applies under the taxpayer’s

former and new methods of accounting (if none, state and explain);

(vi) if any item of property is public utility property within the

meaning of § 168(i)(10) or former § 167(l)(3)(A), as applicable, a statement providing that

the taxpayer agrees to the following additional terms and conditions:

(A) a normalization method of accounting (within the

meaning of former § 167(l)(3)(G), former § 168(e)(3)(B), or § 168(i)(9), as applicable) will

be used for the public utility property subject to the application;

(B) as of the beginning of the year of change, the

taxpayer will adjust its deferred tax reserve account or similar reserve account in the



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taxpayer’s regulatory books of account by the amount of the deferral of federal income tax

liability associated with the § 481(a) adjustment applicable to the public utility property

subject to the application; and

(C) within 30 calendar days of filing the federal income

tax return for the year of change, the taxpayer will provide a copy of the completed

application to any regulatory body having jurisdiction over the public utility property subject

to the application;

(vii) if the taxpayer is changing the classification of an item of §

1250 property placed in service after August 19, 1996, to a retail motor fuels outlet under §

168(e)(3)(E)(iii), a statement containing the following representation: “For purposes of §

168(e)(3)(E)(iii) of the Internal Revenue Code, the taxpayer represents that (A) 50 percent

or more of the gross revenue generated from the item of § 1250 property is from the sale of

petroleum products (not including gross revenue from related services, such as the labor

cost of oil changes and gross revenue from the sale of nonpetroleum products such as tires

and oil filters), (B) 50 percent or more of the floor space in the item of property is devoted

to the sale of petroleum products (not including floor space devoted to related services,

such as oil changes and floor space devoted to nonpetroleum products such as tires and

oil filters), or (C) the time of § 1250 property is 1,400 square feet or less.”; and

(viii) if the taxpayer is changing the classification of an item of

property from § 1250 property to § 1245 property under § 168 or former § 168, a statement

of the facts and law supporting the new § 1245 property classification, and a statement

containing the following representation: “Each item of depreciable property that is the



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subject of the application filed under section 2.01 of the APPENDIX of Rev. Proc. 2002-9

for the year of change beginning [Insert the date], and that is reclassified from [Insert, as

appropriate: nonresidential real property, residential rental property,

19-year real property, 18-year real property, or 15-year real property] to an asset class of

[Insert, as appropriate, either: Rev. Proc. 87-56, 1987-2 C.B. 674, or Rev. Proc.

83-35, 1983-1 C.B. 745] that does not explicitly include § 1250 property, is § 1245

property for depreciation purposes.”

(3) Section 481(a) adjustment. Because the adjusted basis of the property is

changed as a result of a method change made under section 2.01 of this APPENDIX (see

section 2.01(4) of this APPENDIX), items are duplicated or omitted. Accordingly, this

change is made with a § 481(a) adjustment. This adjustment may result in either a

negative § 481(a) adjustment (a decrease in taxable income) or a positive § 481(a)

adjustment (an increase in taxable income) and may be a different amount for regular tax,

alternative minimum tax, and adjusted current earnings purposes. This § 481(a)

adjustment equals the difference between the total amount of depreciation taken into

account in computing taxable income for the property under the taxpayer’s former method

of accounting (including the amount attributable to any property described in section

2.01(1)(b) of this APPENDIX that is included in the taxpayer’s Form 3115), and the total

amount of depreciation allowable for the property under the taxpayer’s new method of

accounting (as determined under section 2.01(5) of this APPENDIX, and including the

amount attributable to any property described in section 2.01(1)(b) of this APPENDIX that

is included in the taxpayer’s Form 3115), for open and closed years prior to the year of



- 21 -

change. However, the amount of the § 481(a) adjustment must be adjusted to account for

the proper amount of the depreciation allowable that is required to be capitalized under any

provision of the Code (for example, § 263A) at the beginning of the year of change.

(4) Basis adjustment. As of the beginning of the year of change, the basis of

depreciable property to which section 2.01 of this APPENDIX applies must reflect the

reductions required by § 1016(a)(2) for the depreciation allowable for the property (as

determined under section 2.01(5) of this APPENDIX).

(5) Meaning of depreciation allowable.

(a) In general. Section 2.01(5) of this APPENDIX provides the

amount of the depreciation allowable determined under § 56(a)(1), § 56(g)(4)(A), § 167, §

168, § 197, § 1400I, or § 1400L(c), or former § 168. This amount, however, may be limited

by other provisions of the Code (for example, § 280F).

(b) Section 56(a)(1) property. The depreciation allowable for any

taxable year for property for which depreciation is determined under § 56(a)(1) is

determined by using the depreciation method, recovery period, and convention provided

for under § 56(a)(1) that applies for the property’s placed-in-service date.

(c) Section 56(g)(4)(A) property. The depreciation allowable for any

taxable year for property for which depreciation is determined under § 56(g)(4)(A) is

determined by using the depreciation method, recovery period or useful life, as applicable,

and convention provided for under § 56(g)(4)(A) that applies for the property’s placed-in-

service date.

(d) Section 167 property. Generally, for any taxable year, the



- 22 -

depreciation allowable for property for which depreciation is determined under § 167, is

determined either:

(i) under the depreciation method adopted by a taxpayer for

the property; or

(ii) if that depreciation method does not result in a reasonable

allowance for depreciation or a taxpayer has not adopted a depreciation method for the

property, under the straight-line depreciation method.

For determining the estimated useful life and salvage value of the property, see

§ 1.167(a)-1(b) and (c), respectively.

The depreciation allowable for any taxable year for property subject to § 167(f)

(regarding certain property excluded from § 197) is determined by using the depreciation

method and useful life prescribed in § 167(f). If computer software is depreciated under §

167(f)(1) and is qualified property (as defined in § 168(k)(2) and

§ 1.168(k)-1T of the temporary Income Tax Regulations), 50-percent bonus depreciation

property (as defined in § 168(k)(4) and § 1.168(k)-1T), or qualified New York Liberty Zone

(Liberty Zone) property (as defined in § 1400L(b)(2) and § 1.1400L(b)-1T), the

depreciation allowable for that computer software under § 167(f)(1) is also determined by

taking into account the additional first year depreciation deduction provided by § 168(k) or

§ 1400L(b), as applicable, unless the taxpayer made a timely valid election not to deduct

any additional first year depreciation for the computer software.

(e) Section 168 property. The depreciation allowable for any taxable

year for property for which depreciation is determined under § 168, is determined as



- 23 -

follows:

(i) by using either:

(A) the general depreciation system in § 168(a); or

(B) the alternative depreciation system in § 168(g) if the

property is required to be depreciated under the alternative depreciation system pursuant

to § 168(g)(1) or other provisions of the Code (for example, property described in §

263A(e)(2)(A) or § 280F(b)(1)). Property required to be depreciated under the alternative

depreciation system pursuant to § 168(g)(1) includes property in a class (as set out in §

168(e)) for which the taxpayer made a timely valid election under § 168(g)(7); and

(ii) if the property is qualified property, 50-percent bonus

depreciation property, or Liberty Zone property, by taking into account the additional first

year depreciation deduction provided by § 168(k) or § 1400L(b), as applicable, unless the

taxpayer made a timely valid election not to deduct the additional first year depreciation (or

made a deemed election not to deduct the additional first year depreciation; for further

guidance, see Rev. Proc. 2002-33, 2002-1 C.B. 963, or Rev. Proc. 2003-50, 2003-29

I.R.B. 119) for the class of property (as defined in

§ 1.168(k)-1T(e)(2) or § 1.1400L(b)-1T(e)(2), as applicable) in which that property is

included.

(f) Section 197 property. The depreciation allowable for any taxable

year for an amortizable § 197 intangible (including any property for which a timely election

under § 13261(g)(2) of the 1993 Act was made) is determined in accordance with § 1.197-

2(f).



- 24 -

(g) Former § 168 property. The depreciation allowable for any

taxable year for property subject to former § 168 is determined by using either:

(i) the accelerated method of cost recovery applicable to the

property (for example, for 5-year property, the recovery method under former

§ 168(b)(1)); or

(ii) the straight-line method applicable to the property if the

property is required to be depreciated under the straight-line method (for example,

property described in former § 168(f)(12) or former § 280F(b)(2)) or if the taxpayer elected

to determine the depreciation allowance under the optional straight-line percentage (for

example, the straight-line method in former § 168(b)(3)).

(h) Qualified revitalization building. The depreciation allowable for any

taxable year for any qualified revitalization building (as defined in § 1400I(b)(1)) for which

the taxpayer has made a timely valid election under § 1400I(a) is determined as follows:

(i) if the taxpayer elected to deduct one-half of any qualified

revitalization expenditures (as defined in § 1400I(b)(2)) chargeable to a capital account

with respect to the qualified revitalization building for the taxable year in which the building

is placed in service by the taxpayer, the depreciation allowable for the property’s placed-in-

service year is equal to one-half of the qualified revitalization expenditures for the property

and the depreciation allowable for the remaining recovery period of the property is

determined using the general depreciation system of § 168(a) or the alternative

depreciation system of § 168(g), as applicable; or

(ii) if the taxpayer elected to amortize all of the qualified



- 25 -

revitalization expenditures chargeable to a capital account with respect to the qualified

revitalization building ratably over the 120-month period beginning with the month in which

the building is placed in service, the depreciation allowable is determined in accordance

with this election.

(i) Qualified New York Liberty Zone leasehold improvement property.

The depreciation allowable for any taxable year for qualified New York Liberty Zone

leasehold improvement property (as defined in § 1400L(c)(2)) is determined by using the

depreciation method and recovery period prescribed in § 1400L(c).”

SECTION 2. Section 2.02 of the APPENDIX of Rev. Proc. 2002-9 is deleted and replaced

with the following:

“.02 Permissible to permissible method of accounting for depreciation.

(1) Description of change. This change applies to a taxpayer that wants to

change from a permissible method of accounting for depreciation under § 56(g)(4)(A)(iv)

or § 167 to another permissible method of accounting for depreciation under

§ 56(g)(4)(A)(iv) or § 167. Pursuant to § 1.167(a)-7(a) and (c), a taxpayer may account for

depreciable property either by treating each individual asset as an account or by

combining two or more assets in a single account and, for each account, depreciation

allowances are computed separately.

(2) Scope.

(a) Applicability. This change applies to any taxpayer wanting to

make a change in method of accounting for depreciation specified in section 2.02(3) of

this APPENDIX for the property in an account:



- 26 -

(i) for which the present and proposed methods of accounting

for depreciation specified in section 2.02(3) of this APPENDIX are permissible methods

for the property under § 56(g)(4)(A)(iv) or § 167; and

(ii) that is owned by the taxpayer at the beginning of the year of

change.

(b) Certain scope limitations inapplicable. The scope limitations in

sections 4.02(7) and 4.02(8) of this revenue procedure are not applicable to this change.

(c) Inapplicability. This change does not apply to:

(i) any taxpayer that is subject to § 263A and that is required to

capitalize the costs with respect to which the taxpayer wants to change its method of

accounting under section 2.02 of this APPENDIX, if the taxpayer is not capitalizing the

costs as required;

(ii) any property to which § 1016(a)(3) (regarding property held

by a tax-exempt organization) applies;

(iii) any property described in § 167(f) (regarding certain

property excluded from § 197);

(iv) any property subject to § 167(g) (regarding property

depreciated under the income forecast method);

(v) any property for which depreciation is determined under

§ 56(a)(1), § 56(g)(4)(A)(i), (ii), (iii), or (v), § 168, § 1400I, §1400L(b), or § 1400L(c), or

§ 168 prior to its amendment in 1986 (former § 168);

(vi) any property that the taxpayer elected under § 168(f)(1) or



- 27 -

former § 168(e)(2) to exclude from the application of, respectively, § 168 or former

§ 168;

(vii) any property for which depreciation is determined in

accordance with § 1.167(a)-11 (regarding the Class Life Asset Depreciation Range

System (ADR));

(viii) any depreciable property for which the taxpayer is

changing the depreciation method pursuant to § 1.167(e)-1T(b) of the temporary Income

Tax Regulations (change from declining-balance method to straight-line method), §

1.167(e)-1T(c) (certain changes for § 1245 property), or § 1.167(e)-1T(d) (certain changes

for § 1250 property). These changes must be made prospectively and are not permitted

under the cited regulations for property for which the depreciation is determined under §

168, § 1400I, § 1400L, or former § 168; or

(ix) any distributor commissions (as defined by section 2 of

Rev. Proc. 2000-38, 2000-2 C.B. 310) for which the taxpayer is changing the useful life

under the distribution fee period method or the useful life method (both described in Rev.

Proc. 2000-38). A change in this useful life is corrected by adjustments in the applicable

taxable year provided under § 1.446-1T(e)(2)(ii)(d)(3)(i).

(3) Changes covered. Section 2.02 of this APPENDIX only applies to the

following changes in methods of accounting for depreciation:

(a) a change from the straight-line method to the

sum-of-the-years-digits method, the sinking fund method, the unit-of-production method, or

the declining-balance method using any proper percentage of the straight-line rate;



- 28 -

(b) a change from the declining-balance method using any

percentage of the straight-line rate to the sum-of-the-years-digits method, the sinking fund

method, or the declining-balance method using a different proper percentage of the

straight-line rate;

(c) a change from the sum-of-the-years-digits method to the sinking

fund method, the declining-balance method using any proper percentage of the

straight-line rate, or the straight-line method;

(d) a change from the unit-of-production method to the straight-line

method;

(e) a change from the sinking fund method to the straight-line method,

the unit-of-production method, the sum-of-the-years-digits method, or the declining-balance

method using any proper percentage of the straight-line rate;

(f) a change in the interest factor used in connection with a compound

interest method or sinking fund method;

(g) a change in averaging convention as set forth in

§ 1.167(a)-10(b). However, as specifically provided in § 1.167(a)-10(b), in any taxable

year in which an averaging convention substantially distorts the depreciation allowance for

the taxable year, it may not be used (see Rev. Rul. 73-202, 1973-1 C.B. 81);

(h) a change from charging the depreciation reserve with costs of

removal and crediting the depreciation reserve with salvage proceeds to deducting costs

of removal as an expense and including salvage proceeds in taxable income as set forth in

§ 1.167(a)-8(e)(2). See Rev. Rul. 74-455, 1974-2 C.B. 63. This change, however, may be



- 29 -

made under this revenue procedure only if:

(i) the change is applied to all items in the account for which

the change is being made; and

(ii) the removal costs are not required to be capitalized under

any provision of the Code (for example, § 263(a), 263A, or 280B);

(i) a change from crediting the depreciation reserve with the salvage

proceeds realized on normal retirement sales to computing and recognizing gains and

losses on the sales (see Rev. Rul. 70-165, 1970-1 C.B. 43);

(j) a change from crediting ordinary income (including the combination

method of crediting the lesser of estimated salvage value or actual salvage proceeds to

the depreciation reserve, with any excess of salvage proceeds over estimated salvage

value credited to ordinary income) with the salvage proceeds realized on normal retirement

sales, to computing and recognizing gains and losses on the sales (see Rev. Rul. 70-166,

1970-1 C.B. 44);

(k) a change from item accounting for specific assets to multiple asset

accounting for the same assets, or vice versa;

(l) a change from one type of multiple asset accounting (pooling) for

specific assets to a different type of multiple asset accounting (pooling) for the same

assets;

(m) a change from one method described in Rev. Proc. 2000-38 for

amortizing distributor commissions (as defined by section 2 of Rev. Proc. 2000-38, 2000-2

C.B. 310) to another method described in Rev. Proc. 2000-38 for amortizing distributor



- 30 -

commissions; or

(n) a change from pooling to a single asset, or vice versa, for

distributor commissions (as defined by section 2 of Rev. Proc. 2000-38, 2000-2 C.B. 310)

for which the taxpayer is using the distribution fee period method or the useful life method

(both described in Rev. Proc. 2000-38).

(4) Additional requirements. A taxpayer also must comply with the following:

(a) Basis for depreciation. At the beginning of the year of change, the

basis for depreciation of property to which this change applies is the adjusted basis of the

property as provided in § 1011 at the end of the taxable year immediately preceding the

year of change (determined under the taxpayer’s present method of accounting for

depreciation). If applicable under the taxpayer’s proposed method of accounting for

depreciation, this adjusted basis is reduced by the estimated salvage value of the property

(for example, a change to the straight-line method).

(b) Rate of depreciation. The rate of depreciation for property

changed to:

(i) the straight-line or the sum-of-the-years-digits method of

depreciation must be based on the remaining useful life of the property as of the beginning

of the year of change; or

(ii) the declining-balance method of depreciation must be

based on the useful life of the property measured from the placed-in-service date, and not

the expected remaining life from the date the change becomes effective.

(c) Regulatory requirements. For changes in method of depreciation



- 31 -

to the sum-of-the-years-digits or declining-balance method, the property must meet the

requirements of § 1.167(b)-0 or 1.167(c)-1, as appropriate.

(d) Public utility property. If any item of property is public utility

property within the meaning of former § 167(l)(3)(A), the taxpayer must attach to the

application a statement providing that the taxpayer agrees to the following additional terms

and conditions:

(i) a normalization method of accounting within the meaning of

former § 167(l)(3)(G) will be used for the public utility property subject to the application;

and

(ii) within 30 calendar days of filing the federal income tax

return for the year of change, the taxpayer will provide a copy of the completed application

to any regulatory body having jurisdiction over the public utility property subject to the

application.

(5) Section 481(a) adjustment. Because the adjusted basis of the property is

not changed as a result of a method change made under section 2.02 of this APPENDIX,

no items are being duplicated or omitted. Accordingly, no § 481(a) adjustment is required

or necessary.”

SECTION 3. Section 2B of the APPENDIX of Rev. Proc. 2002-9 is deleted and replaced

with the following:

“SECTION 2B. COMPUTER SOFTWARE EXPENDITURES (§§ 162, 167, AND

197)

.01 Description of change. This change applies to a taxpayer that wants to change





- 33 -

provided under section 3 of Rev. Proc. 2004-11, 2004-3 I.R.B. , for an item of

depreciable or amortizable property that has been disposed of by the taxpayer. Section 3

of Rev. Proc. 2004-11 allows a taxpayer to make a change in method of accounting for

depreciation for the disposed property if the taxpayer used an impermissible method of

accounting for depreciation for the property under which the taxpayer did not take into

account any depreciation allowance, or did take into account some depreciation but less

than the depreciation allowable, in the year of change (as defined in section 2.05(3) of this

APPENDIX) or any prior taxable year.

(2) Scope. This change applies to a taxpayer and an item of depreciable or

amortizable property that are within the scope of section 3.01 of Rev. Proc. 2004-11,

provided:

(a) the taxpayer files the original Form 3115 with the taxpayer’s

amended federal tax return for the year of change (as defined in section 2.05(3) of this

APPENDIX) prior to the expiration of the period of limitation for assessment under

§ 6501(a) for the taxable year in which the item of depreciable or amortizable property was

disposed of by the taxpayer; and

(b) the taxpayer’s amended federal tax return for the year of change

(as defined in section 2.05(3) of this APPENDIX) includes the adjustments to taxable

income and any collateral adjustments to taxable income or tax liability (for example,

adjustments to the amount or character of the gain or loss of the disposed depreciable or

amortizable property) resulting from the change in method of accounting for depreciation

made by the taxpayer under section 2.05 of this APPENDIX.



- 34 -

(3) Year of change. The year of change for this change is the taxable year in

which the item of depreciable or amortizable property was disposed of by the taxpayer.

(4) Scope limitations inapplicable. The scope limitations in section 4.02 of

this revenue procedure do not apply. If the taxpayer is under examination, before an

appeals office, or before a federal court at the time that a copy of the Form 3115 is filed

with the national office, the taxpayer must provide a copy of the Form 3115 to the

examining agent, appeals officer, or counsel for the government, as appropriate, at the

time the copy of the Form 3115 is filed with the national office. The Form 3115 must

contain the name(s) and telephone number(s) of the examining agent, appeals officer, or

counsel for the government, as appropriate.

(5) Filing requirements. Notwithstanding section 6.02(3)(a) of this revenue

procedure, a taxpayer making this change must attach the original Form 3115 to the

taxpayer’s timely filed amended federal tax return for the year of change and must file the

required copy (with signature) of the Form 3115 with the national office no later than when

the original Form 3115 is filed with the amended federal tax return for the year of change.

(6) Section 481(a) adjustment period. A taxpayer must take the § 481(a)

adjustment into account in the year of change.”

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